INSIGHT: Recovery from 'unprecedented' downturn will take time

29 April 2009 18:01[Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The downturn has ripped through the chemicals sector, a point on which there is little doubt. But it is the breadth of the volume decline that is so noticeable and potentially damaging.

The diversity of the chemicals business is a strength – as well as a complication – when it comes to trying to get a handle on where the sector generally might be heading. But that diversity has offered little protection from the slump in global manufacturing in the fourth quarter of 2008 and, most noticeably, in the first quarter of 2009.

One can only hope that the first quarter of 2009 represents the nadir in terms of demand for most chemicals.

The downturn has been deep and wide. Specialties makers have suffered in businesses related to automobiles, construction and consumer electronics. The downturn in consumer goods has hit almost everyone.

The upstream slump is equally as dramatic. Take Shell, which charted on Wednesday a 22% fall in base chemicals volumes (that's olefins and aromatics) in the first quarter (compared with the first quarter of 2008), and a 20% fall in volumes of first-line derivatives.

Shell makes the sort of chemicals that feed other (chemicals) makers and more widely used products, such as solvents.

Go a step sideways, to a company like BP, and the picture is nigh on identical: a 26% fall in chemicals production in the first quarter. BP makes acetyls and the purified terephthalic acid that feeds into polyester manufacture.

Take a step further downstream and look at polycarbonate, polyurethanes and coatings, which are made by Bayer and are used in construction, furniture and other consumer applications.

The poor performance of Bayer MaterialScience in the first quarter was worse than the market expected and helped push the Bayer share price down. The fall in sales for Bayer MaterialScience was 38% when adjusted for portfolio changes and currency effects.

Bayer CEO Werner Wenning called the fall in volumes “steep”, adding that nearly all the subgroup businesses were hit in all regional markets. “This is an unprecedented development for Bayer,” he said.

Bayer's currency-adjusted polycarbonate sales were down 42% and adjusted polyurethane sales down 40%. Sales of speciality coatings and adhesives were down 37%.

Such lower demand levels have forced operating cutbacks at Bayer and across great swathes of the chemicals business. Some rates have begun to move back up, but the upward turn has been sporadic.

To press the point home further, the Netherlands-based life sciences and materials group DSM this week reported depressed materials sales as the global recession hit harder.

Almost half of the DSM businesses are heavily affected by the downturn even after its shift in recent years towards life sciences. The drop in group sales was 22%. And the company used that word again: “unprecedented”.

The good news – there is a little – is that the demand slump appears to have ground to a halt in some markets.

“Although no improvement in demand in end-markets seems to be imminent, we are not at this point in time seeing a further deterioration either,” DSM CEO Feike Sijbesma said this week.

Bayer's CEO said on Wednesday that the downturn seems to be bottoming out. “The first signs of a modest recovery in demand are appearing,” Wenning said.

The signs of a bottom to this part of the down cycle are coming from ?xml:namespace>China, where demand has been stimulated by freer credit. Higher petrochemical and polymer prices have also driven speculative trade. Product is being pulled from North America and Europe by higher prices, and possibly by stronger underlying demand.

Yet it is way too early to be overly optimistic for chemicals. Established producers – those who do not sit in close proximity to potentially fast-growing markets or on top of cost-advantaged feedstocks – are in a particularly difficult position.

This downturn has shown that a great many chemical products are interlinked, in that they serve markets important to the global manufacturing economy.

The drop in demand witnessed at the turn of the year was unprecedented. It was broadly based in product and geographic terms.

A return to growth cannot be achieved until important downstream industries and consuming markets for chemicals begin to recover. And that could take some time.